Search this website. You can use fund codes to locate specific funds

Weekly Credit Insight

Chart of the week: yield-curve control will support market normalisation

Market normalisation is underway, supported by the rising probability that the Federal Reserve will carry out yield-curve control and a better-than-expected recovery in Purchasing Managers Index readings. Earlier this year, the dual shock of the oil-price crash and coronavirus crisis encouraged institutions to hoard cash and resulted in the greatest liquidity squeeze in a decade.

Markets responded in typical fashion to the decline in liquidity condition: credit curves inverted and both bonds and higher-quality credit underperformed (the latter on a beta-adjusted basis).

Since then, the primary market has reopened and even businesses exposed to the pandemic shock have been able to access funding, causing credit curves to steepen again (see figure 1). Earnings season gave investors an insight into the impact of the crisis on cash-flow generation, as well as what tools firms have to navigate the uncertainty, meaning that high-quality credit started to lead the market recovery.

Figure 1. Curves start to steepen

Source: Federated Hermes, Bloomberg, as at June 2020.

The relationship between the synthetic and cash markets has also largely normalised. Primary issuance has increased as companies hurried to take advantage of the positive climate and improve their liquidity position. This has resulted in strong flows into global credit markets as investors start to see the benefits that the asset class has to offer in the current environment.  

More Insights

SDG Engagement Equity commentary: Glanbia
We are engaging with current holding Glanbia to create positive impacts on society.
Credit Pulse: market update - 15 January 2021
How does the fixed-income team at the international business of Federated Hermes see this year shaping up?
Weekly Credit Insight
Chart of the week: fallen angels fly high
Found in space: how markets could make contact with reality in 2021
This month, Fiorino looks to the stars for an alien-eye view of Earthly financial conditions...
Global Emerging Markets: country allocation review 2021
We consider our 2021 country allocations for global emerging markets.
Global Equities case study: Vonovia
We examine the favourable ESG attributes of current holding Vonovia